As the Nebraska Legislature gets ready to convene in January, senators are facing questions on how to handle the state’s finances that will affect taxpayers and Nebraskans who use state services.

On a recent crisp fall afternoon at Arbor Day Farm in Nebraska City, inside a crowded conference room, senators and senators-elect in the Nebraska Legislature gathered to discuss the upcoming legislative session. It fell to Sen. John Stinner, chairman of the budget-writing Appropriations Committee, to give the first presentation.

Stinner told his colleagues it wasn’t his idea.

“I had nothing to do with the agenda -- putting the budget first. I did google up jokes for budgets. There (are) none,” Stinner said. “So you’re either going to be bored to death or angry or put into a state of depression. (Or) several of those.”

Stinner then proceeded to deliver the gloomy budget news. Historically, state tax revenues have grown by about 4.7 percent per year.

“This biennium that we’re in right now is a 5 percent revenue increase. This is projected to go to 3.3, and then to 2.8. That trend is not good,” he said.

Those projections reflect new estimates made by the state’s Economic Forecasting Advisory Board in October. But the budget picture is constantly changing. Since then, the amount the state is projected to get from the federal government for Medicaid has gone up, and the amount it’s projected to spend on school aid has gone down.

Voters approved expanding Medicaid, which will add to required state spending. On balance, the state is projected to end the next two-year budget cycle $95 million short of the budget reserve that it’s required to have. That may sound like a big number, but it pales in comparison to the projected $1 billion budget shortfall that it’s faced in some recent years.

One factor helping close the gap is sales taxes Nebraskans are expected to start paying on items purchased online from so-called “remote sellers” – companies without a physical presence in the state. Legislative Fiscal Analyst Tom Bergquist said the change follows a U.S. Supreme Court decision on a challenge to a South Dakota law that imposed those taxes.

“After that ruling came out in favor of South Dakota in July, (the) Department of Revenue issued a press release that starting January 1 of 2019, they’re going to actively pursue collection of sales tax revenue on remote sellers under the existing law -- that they don’t need any additional legislation,” Bergquist noted.

Bergquist pointed to estimates that internet sales taxes would bring in $9 million this fiscal year, $26 million next year and $30 million the year after that. And he said out-of-state sellers would probably collect the sales tax even if Nebraska doesn’t require them to.

“Eventually, regardless of whether they’re mandated or voluntary, basically it’s going to be more of a pain… to not collect and remit than it is to just go ahead and do it. If I have to do it for 45 states, I might as well do it for the other five,” he said.

Sen. Brett Lindstrom (Photo courtesy Nebraska Legislature)

But others, including Sen. John McCollister, who has introduced internet sales tax legislation in the past, said they still think legislation is necessary. Sen. Brett Lindstrom, a candidate to head the Revenue Committee, said in a subsequent interview that’s his inclination as well.

“I tend to lean toward more of a statute correction,” Lindstrom said.

Lindstrom said that’s just a small part of what he hopes will be a major overhaul of the tax system, reforming income, sales, property and business taxes.

One stabilizing factor in the midst of possible change is the state’s cash reserve or “rainy day” fund. It’s projected to contain just over $400 million at the end of the next budget cycle. That amounts to about 8 percent of the state’s yearly spending of about $5 billion. Stinner says he wants to aim to have twice that much.

“That is what we need to build up to as a maximum reserve – as a fully-funded reserve -- would be at 16 percent,” of annual spending, he said.

Josie Schafer (Photo courtesy University of Nebraska at Omaha)

That would be the equivalent of having a savings account containing about two months’ worth of spending, in case future tax revenues drop off. Josie Schafer of the University of Nebraska-Omaha’s Center for Public Affairs Research puts that in a national perspective.

“Our rainy day fund is around the median, which makes you think maybe it’s not too bad. But we have much stricter and constitutional limits on debt that make it such that it’s a real concern in the state,” Schafer said.

Nebraska’s state constitution limits debt to $100,000 except for roads, water projects, and dormitory construction.

How the state will meet its obligations, while dealing with demands to expand Medicaid, relieve taxes, and maintain or increase reserves, will be the balancing act the Legislature faces when senators convene January 9.